Financial Impact of Inventory

Management in Small and Medium

Businesses

NAME- XXXXXX

STUDENT ID- XXXXXX

MBA GLOBAL FINANCE

Abstract
The aim of this research was to assess the financial impact of inventory management
practices in the operational success of small and medium businesses with respect to working
capital and profitability. In order to present the key findings of this research, the strategy of
SLR has been adopted. Hence, a number of databases like Google Scholar were used for
selecting and reviewing relevant articles. A specific inclusion and exclusion criteria was
adopted for the purpose of this research as discussed further ahead. Specific key words were
followed as the search strategy for the articles based on which 50 articles were considered
relevant for the research conduct. However, after the application of inclusion and exclusion
criteria, final review was conducted for 10 articles.

The research has highlighted that inventory management practices have a significant impact
on the financial records of SMEs in four ways namely, profitability, cash flow, balance sheet
and working capital. The research concludes that any errors in the calculation of inventory
can have cascading impacts on income, profits and cost of goods sold. There are a number of
reasons that could reflect inaccuracy of inventory. In all of these cases, SMEs have to focus
on adjusting their inventory for maximum value accuracy. Therefore, accuracy of inventory
management is crucial for maximum accuracy of profitability which makes it a good factor to
indicate forecasting. The adjustment of inventory cannot be identified as a yearly affair. This
has to be done frequently so that no major modifications take place in the value of inventory
while initiating changes.

Due to this reason, the research concludes that SMEs must not ignore the utilisation of
inventory reserve accounts. In terms of cash flows, inventory management can help in
avoiding tax burden, and hence, it has a significant financial impact on SMEs. It can finally
be concluded that the SLR conduct provided valuable insights about the financial impact of
inventory management practices adopted by SMEs with specific emphasis upon the effective
management of working capital and profitability.

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List of Tables
Table 1: Definition of Key Terms ............................................................................................ 11
Table 2: Inclusion and Exclusion Criteria for Data Search and Collection ............................. 17
Table 3: Critical Review of Selected Articles .......................................................................... 36

List of Figures
Figure 1: Conceptual Framework for the Research Conduct................................................... 34
Figure 2: Research Onion ........................................................................................................ 14

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Table of Contents
NAME- PAVAN TEJA POTTELA ............................................................................................ 1
STUDENT ID- 30012504 .......................................................................................................... 1
MBA GLOBAL FINANCE ....................................................................................................... 1
Abstract ...................................................................................................................................... 2
List of Tables .............................................................................................................................. 3
List of Figures ............................................................................................................................ 3
Chapter 1: Introduction .............................................................................................................. 6
1.1 Research Overview .......................................................................................................... 6
1.2 Research Aim and Objectives .......................................................................................... 7
1.3 Research Significance ...................................................................................................... 8
1.4 Research Rationale........................................................................................................... 9
1.5 Research Approach ........................................................................................................ 10
1.6 Key Terms and Definitions ............................................................................................ 11
Chapter 2: Research Methodology........................................................................................... 12
2.1 Research Philosophy ...................................................................................................... 12
2.2 Research Approach ........................................................................................................ 13
2.3 Research Strategy........................................................................................................... 15
2.4 Methodology Choice...................................................................................................... 16
2.5 Method of Data Collection and Analysis ....................................................................... 17
2.5.1 Data Sources ........................................................................................................... 17
2.5.2 Inclusion and Exclusion Criteria ............................................................................. 17
2.5.3 Data Analysis Methods ........................................................................................... 18
2.6 Ethical Consideration ..................................................................................................... 18
2.7 Research Limitations ..................................................................................................... 18
Chapter 3 Literature Review .................................................................................................... 19
3.1 The Significance of Inventory Management .................................................................. 19
3.2 Value of Inventory Management for SMEs ................................................................... 21
3.3 Factors Affecting Inventory Management Success ........................................................ 23
3.4 Relationship between Inventory Management, Working Capital Management and
Profitability .......................................................................................................................... 28
3.5 Best Practices for Inventory Management in SMEs ...................................................... 30
3.6 Conceptual Framework and Summary........................................................................... 34
Chapter 4: Key Findings .......................................................................................................... 36
4.1 Critical Review of Selected Articles and Identification of Themes ............................... 36
4.2 Overview of the Themes ................................................................................................ 44
Chapter 5: Discussion .............................................................................................................. 47

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 5.1 RQ1: What approaches of inventory management can assist SMEs in effective
optimisation of working capital? ......................................................................................... 47
5.2 RQ2: What measures of inventory management should SMEs adopt for the
management of profitability effectively? ............................................................................. 49
5.3 RQ3: What best practices can be recommended to SMEs for the effective management
of inventory? ........................................................................................................................ 52
5.4 Final Insights on Financial Impact of Inventory Management on SMEs ...................... 55
Chapter 6: Conclusion.............................................................................................................. 58
6.1 Conclusion of Key Findings .......................................................................................... 58
6.2 Practical Recommendations for SMEs .......................................................................... 59
6.3 Research Limitations and Future Research Recommendations ..................................... 60
References ................................................................................................................................ 62

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Chapter 1: Introduction

1.1 Research Overview

Inventories are defined as assets that firms hold for sale in their regular course of business, in
their production processes, in the form of supplies or materials to be consumed during
production, or in the performance of services (Bertsimas et al., 2016). In the past, inventories
of components and raw materials, work in progress goods and finished products were
maintained at higher levels by organisations for avoiding the possibilities of running out of
materials. However, maintaining higher inventory levels results in generating hidden
expenses and tied down resources (Bertsimas et al., 2016). In a similar fashion, keeping too
much inventory results in consuming more physical space, developing financial burden, and
increasing the possibility of damage and loss for businesses. While on the other hand,
maintaining too little inventory can result in disrupting the operations of businesses and
impacting their profitability.

According to Mat and Kadir (2016), the primary objective of inventory management is to
maximise the utilisation of the resources of a firm by ensuring appropriate supply of materials
for production processes and reducing the expenses of holding excess inventories. Inventories
play a significant role in ensuring the effective operation of organisational activities (Mat and
Kadir, 2016). Firms can encounter significant challenges in its operations without adequate
and proper management of inventory.

Inventory management is an important aspect of working capital management (Ehrenthal et

al., 2014). Firms require materials and components for producing finished goods, and hence,
efficient management of inventory can result in influencing the financial performance of
businesses. According to Munyao et al. (2015), it is important for businesses to maintain
adequate resources for catering the needs of working capital, particularly inventory. Inventory
control can be regarded as the supply of services and products with the right quantity and
quality, and at the right time. Inventories act as a significant linkage between the sales and
production of a product, and represent a notable percentage of the production costs (Munyao
et al., 2015). For manufacturing businesses, inventories can be the most important and
expensive assets, representing a large percentage of the overall invested capital (Hudnurkar et
al., 2014).

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Past researchers have also highlighted that there is a positive impact of inventory
management on the profitability of a business (Grablowsky, 1976). Researchers like
Grablowsky (1976) and Deakins (2001) have indicated that the practices and policy of
inventory management result in the improvement of business profitability. Deakins (2001)
also highlighted that businesses with efficient management of inventory deliver better
performance with respect to profitability when compared to organisations having a weak
system of inventory management (Deakins, 2001). In context with SMEs, Narasimhan and
Murty (2001) stated that SMEs can ensure profitability enhancement by a focused attention
on management of inventory. Narasimhan and Murty (2001) further indicated that there is a
positive relationship between the practices of inventory management adopted by SMEs and
their profitability. These researchers recommend for SMEs that in order to improve practices
of inventory management, SMEs can consider purchasing products with long account
payables while selling upon shorter terms and conditions of account receivable (Narasimhan
and Murty, 2001). A research by Padachi (2006) further highlighted a positive impact of
inventory management on the profitability of SMEs.

Therefore, appropriate attention on and effective management of inventories have to be the

top-most priorities of management and organisational leaders in order to maintain the
effectiveness and ensure business profitability. According to Hudnurkar et al. (2014), efficient
monitoring and allocation is crucial for the effectiveness of inventory management strategies
of businesses. An improved inventory management approach can make notable contributions
in the financial performance of an organisation (Hudnurkar et al., 2014).

1.2 Research Aim and Objectives

The aim of the final research is to assess the financial impact of inventory management
practices in the operational success of small and medium businesses. The research will focus
on achieving the following objectives:

RO1: To identify key approaches of inventory management that small and medium
businesses adopt for effectively optimising working capital.

RO2: To recognise valuable measures of inventory management adopted by small and

medium businesses for managing profitability.

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RO3: To recommend relevant practices those small and medium businesses can adopt for the
effective management of inventory.

In addressing these research objectives, key emphasis will be laid upon answering the
following research questions:

RQ1: What approaches of inventory management can assist SMEs in effective optimisation
of working capital?

RQ2: What measures of inventory management should SMEs adopt for the management of
profitability effectively?

RQ3: What best practices can be recommended to SMEs for the effective management of
inventory?

1.3 Research Significance

Inventory management is crucial for the financial performance and success of an organisation
as it has been prioritised as the most significant asset listed on the balance sheet. Due to this
reason, inventory management requires adequate management followed by the application of
replenishment role for all of the items (Chan et al., 2017). There must be availability of right
stock at the right location at the lowest possible price and right quantity. There is mostly
occurrence of stock-outs when there is market demand and limited stock for fast sale of
items, which further result in loss of customer loyalty and sales. Higher stock across the
businesses than the key requirements results in higher costs of storage and handling (Singh
and Verma, 2018). The key objective of inventory management is to minimise total costs of
inventory while ensuring maximum operational profitability.

There are a number of cases in which there has been effectiveness of inventory planning and
management decisions with the development and implementation of inventory planning
models. There is a need for achieving balance between acquisition cost and holding inventory
as the value can significantly impact the business profitability. The key findings of this
research will contribute towards best practices that SMEs can adopt for ensuring effective
inventory management (Muchaendepi et al., 2019). The systems of inventory management
help to specify re-order point and order quantity intended specifically for making profits.

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Hence, in order to reach profitability, it is crucial for increasing inventory order size while
obtaining discounts and reducing holding costs. There can be optimal achievement of
business profitability at relevant costs on the basis of ordering and holding costs (Lee et al.,
2019).

The key findings of this research will highlight that the strategies of inventory management
positively impact the financial stability and performance of SMEs. These findings will be
highly significant as they will indicate the strong relationship between strategies of inventory
management and financial decisions utilised across the decisions of return on investment and
working capital. SMEs are known for incurring more than necessary operational costs for the
satisfaction of customer service by holding additional stocks. This was because of poor
planning of inventory and that majority of the SMEs face failure in creating a balance
between responsiveness and efficiency for the management of inventories.

1.4 Research Rationale

SMEs are valuable instruments used by economies for the purpose of employment
development and economic growth. SMEs support the reduction of unemployment and
provision of products that larger businesses fail to deliver across customer group. Even
though SMEs create significant economic growth by employment development, they face a
number of challenges in the delivery of professional and effective services for the customer
(Karadağ, 2018). The overall failure of delivering customer services at micro level because of
challenges like limited funds has further contributed in heated debates regarding the macro-
level sustainability of economic development. Despite this significant role, the overall value
of SMEs lack uniformity all across the globe as there are national differences with respect to
the rates, patterns and levels of change throughout economic development (Gorondutse et al.,
2016).

Irrespective of the instrumental role played by SMEs across the global economy, they tend to
fail during the initial operational processes. Poor practices of working inventory management
are identified as principal reasons for failure of SMEs. This is specifically due to the absence
of formal system in inventory management as they mostly show reliability upon subjective
decisions of inventory management (Nik et al., 2016). Majority of the recent researchers and
theorists in this area postulate the ways through which inventory management has a
significant impact on the risk and profitability of SMEs.

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Vast literature in the field agrees that inaccurate forecast of inventory develops a number of
issues like reduced customer commitment, costly accumulation of physical inventor,
unwanted production, and lost productivity. Effective inventory has paramount significance
with business conduct. Customers expect dynamism and SMEs need to deal with several
competitive challenges for achieving market survival (Munyao et al., 2015). Because of this
competition, only companies with perfect management of logistics will have the ability of
out-competing other business. Inventory is the most significant area of logistics and hence,
SMEs should be implementing several techniques of inventory management. These are best
suitable for SMEs maximizing best outcomes through effective management of inventory
(Chen et al., 2017).

Majority of the SMEs in the manufacturing industry tend to fail in synchronising supply and
demand accurately which further results in stock outs or excess stock. Several techniques of
inventory management are used by SMEs but different techniques have unique impacts on
performance. Therefore, the key findings of this research will place valid efforts for
addressing this research gap in context with impact of inventory management on the
profitability and success of SMEs.

1.5 Research Approach

In order to present the key findings of this research, key emphasis was laid upon the
collection of secondary data. A systematic literature review will be presented in which at least
15 research articles will be selected for achieving the research aim and objectives. The
research articles will be selected on the basis of specific inclusion and exclusion criteria that
will be described in the chapter of research methodology. Specific key words that will be
considered for the final selection of the articles are: SME, inventory management, working
capital, inventory management practices and profitability. In addition, only those articles will
be selected and reviewed those have been published with full available text and between 2015
and 2020. For analysing these articles, the research will adopt the method of thematic
analysis in which different themes will be identified for achieving the respective research
objectives. Therefore, the final research will be primarily descriptive by nature and there will
be key dependence upon the collection of secondary data.

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1.6 Key Terms and Definitions

Table 1: Definition of Key Terms

Key Terms Definitions

Inventory Inventory management is defined as the process used to order, store and
Management utilise business inventory including final goods, components and raw
materials for keeping track of the entire inventory flow.

SMEs SMEs stand for small and medium sized enterprises, defined as a a company
that focuses on maintaining the number of employees, assets and revenues
under a specific threshold.

Working Capital Working capital is the capital used by a business for conducting daily trade
operations, which can be estimated by deducting current liabilities from
current assets.

Profitability Profitability is defined as the ability of the business for producing return on
investment as per the key resources when compared to alternate investment.

Working Capital The key purpose of optimising working capital is to ensure that sufficient
Optimisation cash flow is maintained by a company for meeting the short-term obligations
of debt and operational costs. The improvement of working capital is an
intrinsic aspect in the job description of CFO.

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Chapter 2: Research Methodology

In this chapter, the research methodology adopted throughout this research has been clearly
described, demonstrated and justified. The chapter is presented in accordance with the
Research Onion Framework which is identified in Figure 2 below.

2.1 Research Philosophy

Research philosophy is defined as the establishment of research knowledge, nature and

assumption for perceiving a preliminary reasoning statement (Alharahsheh and Pius, 2020).
The entire process of any research conduct is strongly stemmed with these assumptions.
While there are several research philosophies like pragmatism, post-modernism,
interpretivism, critical realism, and positivism, this research has been conducted by adopting
the philosophy of interpretivism. According to the interpretivism research philosophy, there
can be subjective interpretation for the social setting of inventory management across SMEs
for effective working capital optimisation and profitability enhancement (Sefotho, 2015). The
adoption of interpretivism helped to clearly understand the performance of inventory
management practices by SMEs. Interpretivism is adopted as per the principle that the
researcher was able to perform a significant role to observe the practices of inventory
management across SMEs.

The research philosophy of interpretivism has been adopted in this research based on its
unique benefits. Firstly, this is highly suitable to explore crucial aspects regarding
interrelated, complex relationship between working capital, profitability and inventory
management (Cowling, 2016). Secondly, the research philosophy is highly adequate to
investigate unique, context specific practices of inventory management for enhanced
profitability and working capital optimisation of SMEs (Cowling, 2016). The research
philosophy of interpretivism also provided a significant scope to answer the relevant research
questions in detail. The key findings of this research can also be utilised by future researchers
for investigating the practices of inventory management across SMEs. Hence, the adoption of
interpretivism philosophy seemed highly justified for the research conduct.

However, there were certain challenges of interpretivism as well. Firstly, the descriptive
nature of the research made it extremely time consuming and resource intensive in
comparison with efforts of data collection and analysis under positivism. Limited availability

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of data can result in premature or false assumptions while excess data does not provide scope
for effectively processing the overall data (Pham, 2018). In order to avoid this limitation,
right amount of data was collected from credible sources to ensure that the researcher does
not get confused and the research questions are answered appropriately and effectively.
Further ahead, in adopting the interpretivism philosophy, it was necessary for the researcher
to see and interpret complex phenomenon under investigation from the perspective of SMEs.
It was crucial to reconcile diverse perspectives from secondary data collection without
affecting data from preconceptions or personal biases in the inferences. However, there was
no issue of trust between participants and researcher as there was no collection of primary
data.

2.2 Research Approach

Theories are crucial for structuring and informing any research (Armat et al., 2018).
Moreover, research allows the scope of structuring and informing theory. The reciprocal
relationship between research and theory determines the type of research adopted for a
research conduct. There are two types of research approaches, namely, inductive and
deductive approach (Armat et al., 2018). In both of these approaches, there is crucial
significance of theory while the overall relationship between research and theory may be
different for all approaches (Woiceshyn and Daellenbach, 2018). In order to conduct this
research, the inductive approach has been adopted. Under the inductive research approach,
key emphasis is laid upon the collection of data related to the practices of inventory
management across SMEs. While collecting sufficient data, the researcher has to critique and
review the collected data (Woiceshyn and Daellenbach, 2018). After the stage of collecting
secondary data, the inductive approach provided scope for investigating patterns across data
while developing theory for demonstrating these patterns. Thus, the adoption of inductive
approach begins by a combination of observed patterns and themes for drafting specific
findings related to practices of inventory management in SMEs.

The framework of research onion by Saunders et al. (2012) has been adopted in this research
in order to describe the entire research methodology. The choices made throughout different
layers of the research onion have been identified in the figure below.

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 Research
Philosophy-
Interpretivism

Research
Approach-
Inductive
Approach

Research Strategy-
Systematic
literature Review

Qualitative
Methodology

Cross-
Sectional
Time
Data
Horizon
Collectio
n and
Analysis-
Secondar
y data
collection
and
thematic
analysis

Figure 1: Research Onion

(Source: Saunders et al., 2012)

The inductive approach was adopted because it provides the opportunity of looking at
patterns by observing data and presenting explanations of those themes for answering the
research question. Under this approach, there is no requirement of using hypotheses and
hence, there was freedom to alter the research direction after the commencement of research
process (Alase, 2017). It is crucial to emphasise upon the fact that inductive approach does
not disregard theories during the formulation of research objectives and questions. The key
purpose of adopting inductive approach in this research is generating meanings from the
collected data such that patterns and themes can be identified for developing the theory
(Azungah, 2018). Hence, this provided a significant opportunity observing regularities,
themes and resemblances regarding the practices of inventory management for SMEs and
their financial implications for finally drafting adequate conclusion.

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2.3 Research Strategy

The research strategy of systematic literature review (SLR) has been adopted for conducting
this research. The SLR strategy focuses on identifying, selecting and critically appraising
research for answering a well developed question (Snyder, 2019). Under this research
strategy, it is necessary for following a well defined plan or protocol in which there is clear
statement of criteria for conducting the research. SLR is defined as a transparent
comprehensive search strategy applied across several databases that can be reinvestigated and
explored by other researchers (Snyder, 2019). SLR is based on clearly thought out planning
with key emphasis upon answering the defined questions. The SLR helped in identifying the
type of data selected, critiqued and investigated under the known timeline. The key principles
of SLR as applicable in this context are coverage, accessibility, equality, focus, integration,
clarity and transparency.

The SLR strategy was highly effective as the research strategy provides a strong foundation
for the advancement of knowledge and facilitated development of theory. By the integration
of perspectives and findings from a number of empirical findings, the SLR strategy helped in
addressing the research objectives and answering the research questions in maximum detail
(Gough et al., 2017). The research strategy of SLR is also selected because it is an excellent
approach to synthesize the research findings for using meta- level evidences and uncovering
crucial aspects of inventory management in SMEs (Paul and Criado, 2020). This is a crucial
element to create necessary theoretical frameworks and develop relevant conceptual models
for enhancement of inventory management practices to improve profitability and optimise
working capital across SMEs. Hence, the use of this research strategy was highly justified for
achieving the research objectives.

SLR is demonstrated in this research as a research strategy used to identify and critically
appraise significant research for the collection and analysis of data regarding inventory
management across SMEs. The key purpose of SLR lies in identifying all empirical
evidences that are aligned with the pre-defined criteria of data inclusion for answering the
research questions and achieving the research objective (Paul and Criado, 2020). By
identifying explicit themes after reviewing the selected articles, there is scope of minimizing
biasness in the key findings. Therefore, there was provision of reliable findings out of which
necessary decisions were made for drafting the points of conclusion. The key findings of SLR

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can be enhanced by the inclusion of meta-analysis approaches (Rahi, 2017). However, as
meta- analysis approaches can be extremely complex and challenging, they were replaced
with using the method of thematic analysis.

2.4 Methodology Choice

As the research focuses upon collecting secondary data, it can be stated that the choice of
methodology is the qualitative methodology. For the purpose of this research, secondary
analysis for qualitative data has been presented. This methodology involves the utilisation of
existing database for identifying and reviewing research articles for answering a different set
of research questions (O’Reilly and Kiyimba, 2015). The choice of this methodology was
highly justified because a number of researchers are recognising the value of inventory
management for SMEs and hence, significant insights can be obtained for answering the
research questions and achieving the research objectives (Choy, 2014). The secondary
analysis methodology is different from other approaches considering the critical assessment
of findings, methods, and theory from current qualitative research in the effort of generating
and synthesising meaning from several research articles focusing on different research aims
by applying different research methodologies like meta-study, survey, interview, focus groups
and quantitative analysis (Johnston, 2017).

The choice of this methodology is highly justified because it provides an opportunity of

conducting in-depth thematic analysis from the selected articles by reviewing its data and
analysing it to finally answer the specified research questions. Qualitative research is defined
as the methodology used to collect and analyse non-numerical information for understanding
experiences, opinions or concepts (O’Reilly and Kiyimba, 2015). This can be utilised for
collecting in-depth insights related to the topic or generating new ideas. On the other hand,
quantitative research considers the collection and analysis of numerical data for conducting
statistical analysis and proving specific hypotheses (Largan and Morris, 2019). The adoption
of qualitative research was also highly justified due to the need of maintaining social
distancing specifically considering the pandemic situation.

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2.5 Method of Data Collection and Analysis

2.5.1 Data Sources

In order to present the key findings of this research, the strategy of SLR has been adopted.
Hence, a number of databases like Google Scholar were used for selecting and reviewing
relevant articles. A specific inclusion and exclusion criteria was adopted for the purpose of
this research as discussed further ahead. Specific key words were followed as the search
strategy for the articles based on which 50 articles were considered relevant for the research
conduct. However, after the application of inclusion and exclusion criteria, final review was
conducted for 10 articles. There was tabular presentation of the reviewed data with key
emphasis upon the aim, research methodology, and key findings related to the research topic.

2.5.2 Inclusion and Exclusion Criteria

The below table demonstrates the inclusion and exclusion criteria applicable to the research
for critically reviewing the research articles.

Table 2: Inclusion and Exclusion Criteria for Data Search and Collection

Inclusion Criteria Exclusion Criteria

• Articles related to three of the following • Articles will less than three of the
key words: Inventory management, SME, mentioned key words
working capital, working capital • Articles not yet published or published
optimisation, financial impact and before 2012
profitability • Articles not published in credible sources
• Articles published between 2012 and • Articles with no full availability of text
2021 • Articles not published or available in
• Articles published in credible sources English
like journals, online journals, books, and • Articles not providing any insights for
other peer-reviewed sources answering the research questions
• Articles with full availability of text in
English
• Articles providing valuable insights for
answering the research questions

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2.5.3 Data Analysis Methods

After the reviewing the content of the selected articles, the method of thematic analysis was
adopted for the final analysis of secondary data so that valuable insights can be obtained for
answering the research questions. Thematic analysis is a valuable method used to analyse
qualitative data in a number of fields and disciplines, as applicable in several ways, to
different datasets for addressing a number of different research questions (Vaismoradi and
Snelgrove, 2019). The overall adoption of thematic analysis provides scope of sharing some
level of theoretical flexibility with major differences in context with the underlying
procedures and philosophy for production of themes. The presentation of this methodology
will still remain theoretical by nature.

2.6 Ethical Consideration

It is a strong belief that the collection and analysis of secondary data relieves the researchers
from the overall burden to apply ethical approval, or even think about ethics. However, the
entire research process requires the consideration of ethics, whether or not there is
involvement of primary data collection and analysis (Mertens, 2018). Ethics was required
while initially designing the research such that no harm can be caused. This further moved
ahead in communicating the results such that there is appropriate maintenance of replication,
publicity, and transparency. In the more specific sense, the main ethical concern involved in
collecting and analysing data was that of plagiarism (Traianou, 2014). It was crucial to ensure
that all content is adequately rephrased and analysed with the maintenance of proper
referencing throughout the research conduct.

2.7 Research Limitations

Even though valid efforts were placed for conducting this research effectively, similar to all
researches, this research also involved specific limitations. Firstly, the biggest limitation of
this research is that the sample size for this secondary research was limited to SMEs. This
means that the key findings of this research cannot be applied to all scenarios for effective
inventory management among MNCs. Moreover, the research findings maintained sole
dependence upon obtaining key insights through the collection of secondary data. The
credibility of the research and scope of evidences to support the claims of the research could
be enhanced by the collection of primary data. Even though this is not a research limitation

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because secondary research was highly justified, the use of primary data can still provide
better insights of practical recommendations and future prospects on the selected topic.

Chapter 3 Literature Review

3.1 The Significance of Inventory Management

Inventory management is among the key business processes in the operations of a production
or manufacturing firm, as it is closely associated with sales, purchase, and logistics activities
(Shen et al., 2016). Inventory management engages with the control of stacks across the
overall supply chain. According to Song et al. (2020), inventory management can be defined
as the activities involved in the ordering, storing, handling, and utilising the non-capitalised
assets or inventory of an organisation. In this context, while inventory management of certain
firms may deal with raw materials and components, others may involve finished products to
be offered to markets (Song et al., 2020). The activities of inventory management are
primarily data driven, and are associated with the short-term planning and recording of
events. Muller (2019) asserted that the key focus of inventory management is to maintain the
right level of stock, and record its movement. Inventory management comprises of all
activities and measures involved in managing inventory levels of raw materials and
components, semi-finished products, and finished products in order to ensure the availability
of adequate supplies and low costs of stocks (Muller, 2019).

According to Chan et al. (2017), inventory is important to businesses for performing

production activities, maintaining machinery and plants, along with other operational
requirements. A small disruption in the movement of inventory can have a significant impact
on the operations of business (Chen et al., 2017). Hence, it is crucial for business owners and
managers to lay careful consideration on its inventory management practices. Effective
inventory management can result in enhancing business operations with the efficient flow of
goods and products (Chen et al., 2017). Inventory control and management implies control
and management of business stock as well as the movement of products in response to their
demand. Singh and Verma (2018) argued that inventory management is vital for any business

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for enhancing its competitiveness, improving product quality, minimising inventory costs
through reduction of inventory, and enhancing operational efficiency and flexibility with the
help of pull systems. Few of the key benefits of inventory management are discussed further
ahead.

• Improved inventory accuracy

Effective inventory management can assist businesses and inventory managers in staying
constantly updated with the quantities of stock (Singh and Verma, 2018). This enables them
in ordering only the amount of inventory required for meeting the demand levels. This result
in improving inventory accuracy, while reducing crucial costs related to storage and
transportation.

• Organised warehouse

An effective inventory management strategy results in an organised fulfilment centre, which

further facilitates more efficient current and future order fulfilment plans (Chen et al., 2017).
It also supports organisational warehouse to achieve improved storage management, and
speed up the order fulfilment process.

• Increased customer satisfaction

A robust and systematic inventory tracking system can provide businesses with a
comprehensive view of its stock-in-hand; further yielding improved customer satisfaction
levels (Singh and Verma, 2018). Delayed deliveries or out-of-stock notifications are usually
resented by customers, which may also drive them in switching to other market rivals for
fulfilling their shopping needs. Therefore, effective inventory management can result in
timely processing, shipping and delivery of customer orders, driving increased customer
satisfaction levels.

• Enhanced competitiveness

The inventory control of an organisation is benefitted through the utilisation of inventory

management in terms of improved market shares, further driving competitiveness (Akindipe,
2014). As a significant example, the smart inventory management of Apple provides a notable
competitive advantage to the global leader over other smartphone manufacturers.

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3.2 Value of Inventory Management for SMEs

SMEs occupy a position of strategic importance in developed as well as developing

economies. This is primarily due to the considerable contribution of SMEs towards the
national income, export, employment, and entrepreneurship development in the economy (Hu
et al., 2015). However, the increasing competition level of global business environments due
to rapid globalisation and economic reforms has been exerting significant amount of pressure
on SMEs. Gorondutse et al. (2016) argued that in order to thrive in the global competitive
environment, it is imperative for SMEs to develop and sustain competitive advantage with the
help of high-quality and low-cost products, while functioning with limited resources. Past
literature has suggested that the implementation of inventory management system can be an
effective approach for SMEs to maintain their competitiveness (Gorondutse et al., 2016).

SMEs are often recognised as instruments for employment generation and economic
development of an economy. Ferenčíková (2014) argued that inventory management is of
crucial importance for SMEs in order to achieve their desired combination towards the
industrial development of a nation. Inventories are the goods that are stored for meeting
current and future demands, and ensuring continuity of production operations (Ferenčíková,
2014). Hence, the effective management of inventories is vital for the effectiveness,
profitability and efficiency of SMEs. According to Karadağ (2018), understanding the virtues
of all components of inventory can enable SMEs and warehouse managers in using them
selectively during the implementation of corporate strategies across the marketplace. An
effective inventory management system can be vital for SMEs to strategically develop their
inventory for market promotion, while stabilising their production schedule (Karadağ, 2018).
Inventory control and management plays an important role in the success of SMEs, as
holding excessive or too little stock can have a significant negative impact on their
performance and market reputation.

According to Akindipe (2014), the efficiency of SMEs is determined by the effectiveness of

their inventories. In the current era, customers desire dynamism, due to which SMEs have to
face enormous competitive pressure for surviving in the market. Hence, due to this increasing
competitive environment, only SMEs with best inventory and logistics management will be
capable of out-competing other businesses (Akindipe, 2014). This has driven the need for
SMEs to incorporate different inventory management techniques that best suit their

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organisation for improving inventory control and maximising outputs. However, the findings
of Mat and Kadir (2016) suggested that most SMEs are facing significant challenges in
synchronising supply and demand, which results in stock outs or excess stock.

Different systems for inventory management have been designed on the basis of well-
recognised concepts, techniques and models related to managing inventory. Ngubane et al.
(2015) noted that even though there are limitations of inventory concepts and techniques,
their application can significantly influence the performance of an SME. ABC Analysis is one
of the common inventory management techniques used by organisations (Ngubane et al.,
2015). According to Ravinder and Misra (2014), ABC analysis categorises inventory into
three groups on the basis of annual cost volume. It classifies inventory components into three
classifications – A items (very important items with accurate records and tight control), B
items (items with good records and less tightly controlled), and C items (less important items
with minimal records and simplest controls) (Ravinder and Misra, 2014). Muchaendepi et al.
(2019) argued that ABC analysis is irrelevant of the business size, and, hence, is suitable for
the long-term decision making of SMEs in context with the approach for keeping inventory.
However, the adoption of ABC analysis has been slow in case of SMEs, owing to the various
challenges encountered by them in comparison to bigger entities (Muchaendepi et al., 2019).

According to Nik et al. (2016), significant challenges are faced by SMEs in terms of
communication, information and computing, which further result in increased threats and
competition for them. The effectiveness of an inventory management system is dependent on
the quality of information acquired and the technical abilities of the SME (Nik et al., 2016).
The implementation of ERP (enterprise resource planning) systems from large vendors like
SAP and Oracle involve significant amount of costs, which can be challenging for SMEs to
achieve. Hence, in order to improve their effectiveness, various SMEs have assorted to
implementing less complex systems like SAP All-in-one and MFG/PRO (QAD) with Just-in-
time inventory management technique for enhancing their production scheduling (Mat and
Kadir, 2016). Munyao et al. (2015) suggested that just-in-time is a more holistic inventory
management approach in comparison to other methods. According to the authors, this
approach ensures the delivery of exact amount of material at the moment required, and is
aimed at minimising inventory expenses (Munyao et al., 2015). The just-in-time inventory
management technique can be crucial for reducing costs of SMEs in terms of wastes,
handling, storage, and other inventory investments (Franco and Rubha, 2017).

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According to Hu et al. (2015), material requirement planning (MRP) is another inventory
management system that can have a crucial impact on the performance of SMEs. MRP can
assist SMEs in determining the quantity and time in which materials need to be purchased
(Hu et al., 2015). The adoption of MRP concept can enable SMEs in ensuring that there is
adequate inventory for meeting production demand in normal operating environments. Even
though majority of the MRP systems are based on software applications, MRP can also be
conducted manually by organisations. Akindipe (2014) suggested that MRP system can be an
important decision-making tool in the production processes of SMEs. This is because it
analyses current inventory levels in comparison to the production capacity and the
requirement of manufacturing goods, on the basis of forecasts (Akindipe, 2014). MRP
systems can be leveraged by SMEs for improving their overall efficiency and
competitiveness in terms of inventory control, purchase planning, production planning, work
scheduling, resource management, data management, cost efficiency, and timely delivery of
products to consumers.

In an overall sense, an effective inventory management strategy offers significant value to

SMEs for improving their overall effectiveness and profitability. With the help of a dedicated
inventory management system, SMEs can enhancing their competitive positioning, improve
product quality, enhance operational efficiency and flexibility, improve cash flow, maintain
optimum inventory levels, and improve customer satisfaction levels. Therefore, inventory
management is of vital importance for SMEs to survive in the highly competitive global
business environment.

3.3 Factors Affecting Inventory Management Success

The effective implementation of inventory management and planning can be challenging to

achieve for businesses, particularly SMEs. According to Muller (2019), the continually
increasing complexities of supply chains have been presenting significant challenges for
SMEs to achieve and maintain optimal inventory levels. However, irrespective of the
difficulties, it is important for businesses to effectively manage inventories for sustaining
their competitiveness and improving profitability (Muller, 2019). The identification and
implementation of measures for serving customers in a cost-effective manner can be the
difference between success and decline of a business. Chan et al. (2017) argued that effective
inventory management requires organisations to maintain a constant balance between having

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not too much or not too little. There are various factors that are to be considered by
businesses and warehouse managers during the planning and implementation of inventory
management systems for ensuring their success (Chan et al., 2017). These factors are
discussed further ahead in the research.

Forecast quality

According to Shen et al. (2016), the process of inventory forecasting can be basic as well as
complex. In certain operations, inventory forecast can be a straight-forward calculation that
involves inventory value and sales for a certain period of time to predict returns. While other
calculations like EOQ (economic order quantity) may involve estimates of annual demand,
ordering costs, handling costs, and storing costs for predicting optimal inventory levels (Shen
et al., 2016). Barrow and Kourentzes (2016) suggested that irrespective of the method used
for inventory forecasting, the quality of the forecast significantly influences the operations of
a business. In this context, inaccurate estimates, sales calculations, and seasonal drops or
surges can result in disruptions in business operations and missed deliveries (Barrow and
Kourentzes, 2016).

Lead time

The continual growth of the global economy has also resulted in increasing the complexities
of supply chains. The complexity of supply chains can also be attributed to the widely
distributed nature of purchasing and sourcing raw materials and components (Lee et al.,
2019). In order to minimise their costs and improve profit margins, businesses are sourcing
inventories regionally, nationally as well as globally. The lead time of products from distant
locations may involve latency in logistics at airports or ports in the shipping as well as
receiving end, resulting in adding time to the delivery process (Lee et al., 2019). Furthermore,
longer lead times of raw materials can often result in elongating the cumulative lead time of
finished goods and products (Lee et al., 2019). Hence, in order to deal with item lead times
that exceed replenishment time expectations, it is important for businesses to deploy different
inventory management and capacity strategies for achieving desirable outcomes.

Variability of supply and demand

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According to Ehrenthal et al. (2014), demand variability can be regarded as the difference
between the projected sales of a forecast, and the actual quantity shipped. Demand variability
is evaluated as the standard deviation of demand value, which is divided by mean value. A
low ratio of demand variability indicates consistent demand, while a high ration indicates
volatile or sporadic demand (Ehrenthal et al., 2014). According to Wang and Hu (2018), if
any product has stable mean value but wide variations (below and above the mean),
organisations and inventory managers have to decide how and when to cover shortages
occurring inevitably during high demands. Decision making is an integral aspect of planning
process (Wang and Hu, 2018). Hence, the measurement of demand variability is dependent
on accurate statistics for assisting organisational leaders in making informed and effective
decisions.

Disruptions or variations are an inevitable aspect in the supply chain operations of a business.
These disruptions may be associated with logistics and shipping issues, weather conditions,
and other factors (Ngubane et al., 2015). With the occurrence of disruptions, quick
communication is essential from businesses to inform customers about the status of their
order. With inadequate monitoring and tracking of goods movement in the highly complex
global supply chains, delays can result in impacting the reliability of supply and causing
significant business losses (Ngubane et al., 2015). In an overall sense, variability of demand
and supply are important factors that influence the effectiveness of inventory management of
an organisation.

Service level

According to Hudnurkar et al. (2014), service level can be regarded as the expected
probability to not stock out in the next replenishment cycle. The authors asserted that service
level is the balance between safety stock required for meeting customer demand and covering
lead times with respect to carrying costs (Hudnurkar et al., 2014). Phull et al. (2016) argued
that service level is a trade-off between operational costs and opportunity. The manual
approaches for application of service levels to calculating safety stock are likely to be one-
size-fits-all across all items (Phull et al., 2016). However, these approaches lead to right
inventory levels for certain items, while too less for other items and too much for the rest.
Therefore, the most accurate approach to calculate is the statistical method that requires

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various data elements for all elements (Phull et al., 2016). However, this approach can be
challenging for organisations without an effective planning system.

Customer order visibility

According to Singh and Verma (2018), the early shipment dates requested by customers
assists companies as they do not need specific reliability upon forecasting along with reduced
risks for inaccurate forecasting. Uncertainty is replaced by organisation commitments that
further minimises the requirement for safety stocks (Singh and Verma, 2018). In addition,
statistical forecasts can be supplemented by predictive information associated with consumer
ordering behaviour for improving accuracy.

Customer response time

Response time is an indication of the speed at which the delivery of an order is expected by
the customer. According to Rashid (2016), customer response time can be defined as the
period between the delivery of services or products and the placement of an order. It indicates
the time between which an enquiry is made by consumer regarding a product and when it is
received by the consumer (Rashid, 2016). In comparison to cumulative lead times, shorter
response times necessitate higher investments in terms of capacity, flexibility, and inventory.

Capacities

In collaboration with demand and sales forecasting, inventory forecasts can be driven by
capacity planning. According to Muller (2019), inaccurate demand forecasts and capacity
miscalculations can have a significant impact on supply. This can result in overstock as well
as shortages in inventory (Muller, 2019). As a silo approach is still used by different
operations between lead time, inventory and capacity, there can be difficulties in fully
understanding the tradeoffs, and inventory overages or shortages will continuously be
incurred by the system.

Supply network

In the current era, supply chains are vast, loosely connected, and diverse systems that stretch
all around the world. According to Bertsimas et al. (2016), labour disputes, weather
conditions, regional conflicts, customs issues and various other factors can have a significant

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impact on one or multiple parts of the supply network anytime. Ineffective incorporation of
monitoring and communication systems can lead disruptions to add time and create situations
of inventory risk (Bertsimas et al., 2016). Therefore, it is imperative for businesses to
consider all these aspects, from complex to simple, during the planning of inventory.
However, one of the common issues for majority of the businesses is the manual processes of
planning or spreadsheet-based systems, which are not effective in considering all inputs or
calculating inputs in certain instances (Bertsimas et al., 2016). With ineffective systems,
organisations can face challenges in replenishment planning, specifically in context with
monitoring and establishing stock levels, and executing replenishment activities at the right
lead time.

BOM complexity

Whether from assembly businesses or a discrete enterprise with complex recipes, multi-level
BOMs (bill of materials) can be challenging to navigate. Moreover, in certain instances, the
same product may have different versions of BOMs in different departments. There may also
be differences in measurement units that further add complexity, when numbers are to be
netted down or up for reaching a value comprehended by planners. Situations in which the
planning system and BOM are not linked, and are instead dependent on manual calculations,
can be specifically complicated. Furthermore, there is also an impact on the process during
un-automated or inadequate change management for BOM updates. This can result in
incorrect stocking or ordering of components, which further leads to obsolescence or stock-
outs.

According to HR and Aithal (2020), these issues can be alleviated with the help of an
automated system for inventory planning that comprises of order planning, DRP (distribution
requirement planning), MRP (material requirement planning), and RCCP (rough-cut capacity
requirement planning). Generating statistical forecasts can be automated with the help of this
system for supplementing actual consumer orders. Furthermore, the system can automatically
evaluate safety stocks with the help of statistical methods (HR and Aithal, 2020). The
consumption policies in the system can also guide employees regarding stocking
requirements, and inventory levels are adjusted automatically as per demand changes. In
addition, an automated inventory planning system can also enable businesses in segmenting
items on the basis of business importance, order frequency, forecastability, and accuracy.

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Transitioning to an automated system can also be helpful in mitigating factors associated with
manual tasks, ineffective communication, human error, and lack of monitoring.

3.4 Relationship between Inventory Management, Working Capital Management and

Profitability

According to Vitez (2021), working capital and inventory share a symbolic relationship in an
organisation. Working capital can be regarded as a financial formula for measuring the
operating liquidity of an organisation. The fundamental formula for working capital is current
assets subtracted by current liabilities, considering inventory as part of the current assets of a
business (Vitez, 2021). Businesses deriving huge amount of sales will usually have abundant
amount of inventory that can impact the formula of working capital. According to Bendavid
et al. (2017), inventory can be regarded as a liquid asset in terms of accounting. This
inventory can be sold by businesses fairly quickly for increasing cash to pay operating bills.
Accounts payable is used by most businesses for paying new inventory purchases (Bendavid
et al., 2017). Hence, inventory impacts working capital on both the aspects of liability and
asset. Businesses are usually unable to buy huge amounts of inventory for improving their
position of working capital. This metric helps in ensuring that business stakeholders cannot
be misled by the organisation through simple transactions.

Aminu and Zainudin (2015) argued that when reviewing working capital and inventory, it is
essential to ensure that certain businesses can have multiple inventory types. Production and
manufacturing businesses can engage in providing raw materials, partially finished goods, as
well as finished products inventory. For the purpose of financial accounting, the financial
statement only reports finished goods (Aminu and Zainudin, 2015). This leads to somewhat
uniform working capital calculation. However, management accounting is dependent on
overall internal financial information to measure working capital that includes all inventory
types maintained by the company. According to Ponsian et al. (2014), the association between
working capital and inventory deepens further when reviewing the inventory for condition
and type of goods. Maintaining inventory records for longer time periods can assist
businesses in improving their figure of working capital (Ponsian et al., 2014).

Ramiah et al. (2016) asserted that the primary objective of any business is maximising its
profits and the wealth of shareholders. Therefore, factors that impact profitability have been
widely discussed in past literatures. According to the authors, liquidity and working capital

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management are two factors that directly impact profitability (Ramiah et al., 2016). Working
capital management involves managing current liabilities, current assets, and tries reaching
the optimal level of both components by managing cash, inventory, account liabilities, and
account receivables (Ramiah et al., 2016). According to Singh et al. (2017), managing
inventory refers to maintaining optimum level of inventory. This indicates keeping up the
operational and financial objectives of the business with the help of efficient utilisation of
capital, availability of materials, reduction in costs, and efficiency in production. Hence,
managing inventory has a direct impact on profitability by increasing the sales of the business
or/and by minimising costs like inventory management costs, cost of opportunity, low
purchase prices, and expensive storage costs. The management of accounts receivables
indicate maintenance of account receivables at the optimum level, where there is a trade-off
between cost and profitability. According to Ranganatham (2014), the sales of an organisation
are impacted significantly by the costs of debt collection as well as short collection period.
The management of account receivables should include developing a credit policy,
controlling account receivables and developing collection policy of concern (Ranganatham,
2014).

According to Shin et al. (2015), the significance of achieving optimal level of current
liabilities and current assets is dependent on the management in its efforts for maintaining a
balance between profitability and liquidity. Excessive current assets level, particularly
inventory and account receivables, results in inefficient utilisation of cash (Shin et al., 2015).
Furthermore, it also threatens the operating process in the organisation, resulting in lower
profits. This can further lead to low market value of the organisation. In their research,
Samiloglu and Akgün (2016) asserted that lower current assets level can result in creating a
liquidity issue for the organisation, corollary issue with the settlement of its obligation, and
ineffectiveness for achieving growth in business. This not only threatens the operational
process, but also lowers profit non-conformity with the aim of profit maximisation
(Samiloglu and Akgün, 2016). The forgoing businesses manage their working capital for
generating more profits, considering that their working capital is managed by them for
producing liquidity to the businesses. However, it is important for such businesses to
maintain an adequate liquidity level for meeting their day to day operations (Samiloglu and
Akgün, 2016). Moreover, profitability can be hampered by short or excessive level of
liquidity.

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According to Dbouk et al. (2020), the improvement of cash flow management starts with
comprehending gaps in all components of the cycle of cash conversion. This comprises of
F2F (forecast to fulfil) processes or inventory management. For producing improvements in
working capital from inventory management, global business consider F2F processes across
several functions, including procurement and sourcing, operations and finance (Dbouk et al.,
2020). This is specifically essential considering the potential of conflicting priorities, such as
operations may look to reduce risks to run out of stock, while finance may aim on reducing
amounts stuck in inventory (Dbouk et al., 2020). Hence, carefully developed approaches are
required to balance the trade-offs related to decisions taken in the F2F process.

3.5 Best Practices for Inventory Management in SMEs

The effective management of inventory can be crucial in the successful operation of different
types of small business. Greengard (2019) asserted that the potential of developing a robust
digital inventory management system can be crucial in determining whether the sales of
many organisations translate into profits that are robust enough for creating sustainable
business success. Moreover, businesses conducting operations in the global setting face even
greater challenges in managing inventory effectively (Greengard, 2019). The improvement of
inventory management in SMEs can be challenging in a formidable manner, as it is
associated with almost all aspects of the business. In this context, it is not only essential to
monitor pricing of components and raw materials, but also understand the variables of
demand and supply (Phull et al., 2016). Furthermore, it is also important for SMEs to address
the continuously changing global pricing and availability, as well as the sales demand and
market conditions.

In order to develop an ideal digital inventory management system, it is important for SMEs to
emphasise on several factors like comprehending market conditions, developing a trusted
group of vendors and suppliers, and price negotiations (Munyao et al., 2015). It also requires
the development of internal systems, tools and technologies that can deliver insights to assist
in shaping global inventory management. In the past decade, the globalisation of supply
chains have resulted in introducing opportunities as well as challenges for inventory
management of small businesses (Chan et al., 2017). According to a report by WTO, it has
been estimated that trade volumes have grown at a rate of 4.8 percent every year since the
past 3 decades.

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However, there are also fluctuations in national currencies, pricing and markets, along with
quality-control issues and trade disruptions that often results in disrupting the global supply
chains. Therefore, for improving international inventory management, it is important for
businesses to gain more visibility into real-time events and trends within its overall
enterprise. According to Shin et al. (2015), this task usually comprises procurement,
operations, manufacturing, sales and marketing. Moreover, it may also require the
implementation of enterprise tools and softwares like ERP (enterprise resource planning),
SCM (supply chain management), and others. The authors asserted that it is important for
SMEs to fully link enterprise systems, departments, and external data sources for constructing
a best-practice framework in their inventory management (Shin et al., 2015).

According to Garcia (2017), one of the key reasons for the failure of SMEs is the lack of
adequate financial management. The researcher cited the inability of controlling and
managing cost as the key reason for failure of small businesses. One other important factor
that results in failure of SMEs can be related to the lack of sufficient time and capital for
managing their accounting books (Garcia, 2017).

With the help of a structured questionnaire, Fatoki (2012) conducted a survey in three towns
of South Africa for investigating the financial management practices of SMEs in South
Africa. The author investigated practices of financial management in context with aspects like
financial planning, accounting information, control and analysis, objective and pricing
strategy, investment decision, and working capital management. Fatoki (2012) identified that
the micro units do not engage in calculating reorder levels for stock replenishment, and
instead, reorders with the running out of stock. It has been concluded by the study that SMEs
covered under the study do not have effective financial management practices that enable
improved financial performance and decision making (Fatoki, 2012).

Padachi (2006) conducted a study for evaluating the trends in working capital management,
along with their impact on the performance of SMEs in Mauritius. The findings were
presented based on the study conducted between 58 small businesses of Mauritius in a period
of 5 years (Padachi, 2006). The findings of Padachi (2006) indicated a significant association
between effective working capital management and the performance of businesses. According
to the author, businesses with high receivables and inventories are likely to have lower

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profitability (Padachi, 2006). In another research, McMahon and Holmes (1991) analysed the
financial management practices of SMEs in North America.

The research was conducted in the form of a review of existing literature in the relevant field.
It was identified by McMahon and Holmes (1991) that adequate inventory management
practices were adopted by only less than 15 percent of SMEs in most of the studies.
Furthermore, there is also a lack of evaluation of inventory investments by small businesses
as recommended in text books (McMahon and Holmes, 1991). Moreover, the authors also
identified that economic order quantity method was adopted by less than 10 percent
businesses to evaluate inventory levels for higher success scope and effectiveness.

In their research, Bandara and Rathnasiri (2016) focused on identifying the practices of
working capital management implemented by SMEs in Sri Lanka, and its impact on the
businesses. The study comprised of sample sizes of 60 units and covered aspects of cash,
inventory and receivables. It was identified in the study that SMEs adopted unique
approaches to maintain cash records, inventory and receivables (Bandara and Rathnasiri,
2016). However, those approaches did not involve the utilisation of scientific and advanced
tools. The authors asserted that the lack of advanced methods to manage working capital has
limited the ability of SMEs in achieving the complete potential of these methods (Bandara
and Rathnasiri, 2016). In another research, Pais and Gama (2015) evaluated the significance
of working capital management for the success of small businesses in Portugal. The
researchers argued that poor practices of working capital management have a significant
contribution on the ineffective performance of SMEs (Pais and Gama, 2015).

According to Greengard (2019), effective global inventory management requires SMEs to

have a resilient and robust framework in order to management inventory and conditions.
There are certain key factors that are to be addressed by SMEs for adopting a best-practice
framework for inventory management (Greengard, 2019). These practices are discussed
further ahead.

Understanding and categorising inventory

According to Ngubane et al. (2015), increased visibility into inventory levels is crucial for
SMEs in order to ensure effective inventory management. This usually indicates identifying
low-value and high-value items through the approach of ABC analysis or selective inventory

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control (Ngubane et al., 2015). The method of ABC analysis recognises that all inventory and
stock are not equal, and classifies inventory into three categories (A,B and C), and in
descending order of value. The selective inventory control method allows businesses to
emphasise on inventory resources and investments according to their significance. According
to Ravinder and Misra (2014), ABC analysis assists organisations in optimising their
warehouse space, recognising better pricing strategies, and identifying appropriate suppliers
for the right components or materials (Ravinder and Misra, 2014). ABC analysis is supported
by various software programs for classifying inventory items on the basis of consumption
values of items.

Developing a strategy

There are currently numerous models that can be used by SMEs for the development of a
robust digital inventory management system. This may include vendor- or supplier-managed
inventory, partnering with different businesses, and third-party fulfilment. According to Song
et al. (2020), the adoption of a cross-functional approach comprising sales, marketing,
operations and procurement is essential for small businesses during the development of
strategies for inventory management. The authors asserted that small businesses can also
benefit through the appointment of managers for specifically overseeing the functions of
purchasing and inventory management (Song et al., 2020).

Understanding internal and market conditions

In order to achieve a best-practice system for inventory management, it is important for small
businesses to effectively comprehend availability of component and commodity, current
market pricing (upstream as well as downstream), and sales forecasts (Rashid, 2016). In this
context, SCM and ERP softwares usually deliver real-time visibility into supplier and point-
of-sale data (Wang and Hu, 2018). Moreover, SMEs can also make use of different data
analytics tools and accounting software systems for acquiring deeper insights related to real-
time trends. SMEs may also benefit through the utilisation of third-party data that provide
crucial information associated with market conditions and seasonal demand fluctuations
(Wang and Hu, 2018).

Developing an improved inventory management framework

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The ability of automating processes as well as gaining visibility into external and internal
factors can be crucial for SMEs in the development of a more flexible and agile inventory
management framework (Akindipe, 2014). This may require the utilisation of smart phones,
RFID, bar-coding, and other advanced technological developments. It may also require the
utilisation of cloud resources and network for providing decision makers with important
insights on real-time basis (Singh and Verma, 2018). In an overall sense, the development and
adoption of a best-practice inventory management approach can result in several benefits for
SMEs including high profit margins, lower costs, and the potential of benefitting from market
disruptions and changing conditions.

3.6 Conceptual Framework and Summary

The effective implementation of inventory management and planning can be challenging to

achieve for businesses, particularly SMEs. According to Muller (2019), the continually
increasing complexities of supply chains have been presenting significant challenges for
SMEs to achieve and maintain optimal inventory levels. However, irrespective of the
difficulties, it is important for businesses to effectively manage inventories for sustaining
their competitiveness and improving profitability (Muller, 2019). The identification and
implementation of measures for serving customers in a cost-effective manner can be the
difference between success and decline of a business. Chan et al. (2017) argued that effective
inventory management requires organisations to maintain a constant balance between having
not too much or not too little. There are various factors that are to be considered by
businesses and warehouse managers during the planning and implementation of inventory
management systems for ensuring their success (Chan et al., 2017). In this context, the
conceptual framework developed for this research is as follows:

Figure 2: Conceptual Framework for the Research Conduct

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The effective management of inventory can be crucial in the successful operation of different
types of small business. Greengard (2019) asserted that the potential of developing a robust
digital inventory management system can be crucial in determining whether the sales of
many organisations translate into profits that are robust enough for creating sustainable
business success. Moreover, businesses conducting operations in the global setting face even
greater challenges in managing inventory effectively (Greengard, 2019). However, there are
also fluctuations in national currencies, pricing and markets, along with quality-control issues
and trade disruptions that often results in disrupting the global supply chains. Therefore, for
improving international inventory management, it is important for businesses to gain more
visibility into real-time events and trends within its overall enterprise.

The improvement of inventory management in SMEs can be challenging in a formidable

manner, as it is associated with almost all aspects of the business. In this context, it is not
only essential to monitor pricing of components and raw materials, but also understand the
variables of demand and supply (Phull et al., 2016). Furthermore, it is also important for
SMEs to address the continuously changing global pricing and availability, as well as the
sales demand and market conditions. In order to develop an ideal digital inventory
management system, it is important for SMEs to emphasise on several factors like
comprehending market conditions, developing a trusted group of vendors and suppliers, and
price negotiations (Munyao et al., 2015). It also requires the development of internal systems,
tools and technologies that can deliver insights to assist in shaping global inventory
management. All of these aspects will be elaborated and reflected in key findings of this
research.

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Chapter 4: Key Findings

4.1 Critical Review of Selected Articles and Identification of Themes

Table 3: Critical Review of Selected Articles

Author Aim Research Method Key Findings Themes Identified

RQ1: What approaches of inventory management can assist SMEs in effective optimisation of working capital?

Phuong and Hung To analyse the effect of Generalised Least Squre • Inventory turnover, average payment, Theme 1: Just-in-time
(2020) working capital management regression method on a average receivables, and cash conversion Approach of Inventory
on the profitability of sample of 5,295 listed cycles negatively impacts the profitability Management
businesses. Vietnamese firms. of firms (Phuong and Hung, 2020).
• Just in time is an effective inventory Key Aspects:
management approach that can assist
▪ Using Just-in-
businesses in effective management of
time approach
working capital.
for ordering
• Just in time inventory management
stock
improves working capital by reducing
▪ Implementing
inventory holding costs and increasing
sharing
inventory turnover (Phuong and Hung,
economy
2020).
principles
▪ Renegotiating
Högerle et al. To explore the development Analysis of panel data • Inventory management, accounts payable
(2020) of working capital from 115 listed German management, and accounts receivable payment
management among German companies during the management are important drivers of terms
companies, and its effect on period 2011-2017. working capital management (Högerle et ▪ Providing
shareholder value and al., 2020). discounts for
profitability. • The key inventory management early

approaches that can assist SMEs in payments

effectively optimising working capital

include (Högerle et al., 2020):
▪ Using Just-in-time approach for
ordering stock
▪ Implementing sharing economy
principles
▪ Renegotiating payment terms
▪ Providing discounts for early
payments

Aminu (2012) To explore the determinants Theoretical discussion • Inventory management has a significant
of inventory management as impact on the working capital
a component of working management of businesses (Aminu,
capital for ensuring business 2012).
profitability. • Inventory management has a positive
association with the profitability of
businesses.

37 | P a g e
 • Efficient and effective working capital
management through timely and proper
inventory management can be crucial in
ensuring a balance between liquidity and
profitability tradeoffs (Aminu, 2012).

RQ2: What measures of inventory management should SMEs adopt for the management of profitability effectively?

Karadağ (2018) To examine receivables, cash • Structured • Higher degree of cash and receivables Theme 2: Several KPIs of
and inventory management questionnaires with management practices has a positive inventory management
in SMEs and their 188 SMEs relationship with financial performance of
relationship with firm • Structured Equation businesses (Karadağ, 2018). Key Aspects:

competitiveness and modelling technique • There is a strong positive association

• Inventory
financial performance. to test the between business competitiveness and
turnover
hypotheses financial performance.
• Gross margin
• The inventory management practices that
percent
SMEs should adopt for effective
• Return on
management of profitability include
Investment
(Karadağ, 2018):
• ABC Analysis
▪ Developing an improved
• ROC Algorithms
inventory management
framework
▪ Understanding market and

38 | P a g e
 internal conditions
▪ Categorising inventory with
techniques like ABC analysis
▪ Reducing inventory costs
through just in time inventory
management

Krishnan and To investigate the practices • Random sampling • SMEs with higher mean value in context
Pavithran (2018) of inventory management of 143 SMEs of with inventory practices have high
adopted by SMEs in Kerala, Kerala profitability rates (Krishnan and
India. • Basic frequency Pavithran, 2018).
analysis and • SMEs had a different approach for
ANOVA test maintaining inventory.
• The approaches of inventory management
that can be adopted by SMEs for
effectively managing profitability include
(Krishnan and Pavithran, 2018):
▪ Just in time inventory
management
▪ Economic order quantity
▪ Minimum order quantity

Narkhede and To investigate the influence Testing ROC (Rank • ROC algorithm can be used by SMEs

39 | P a g e
Rajhans (2020) of inventory-related order clustering) along with quantity discounts for
decisions on firm algorithm on a medium- optimising inventory levels and cutting
profitability, and mitigate sized business. overall costs (Narkhede and Rajhans,
inventory management 2020).
issues of SMEs. • SMEs can save almost 47.64 costs with
the help of ROC algorithm and quantity
discounts (Narkhede and Rajhans, 2020).
• The ROC approach can assist SMEs in
identifying different assemblies for
aggregating component requirements, and
formulating an inventory strategy for
minimising inventory carrying costs of all
components.

RQ3: What best practices can be recommended to SMEs for the effective management of inventory?

Orobia et al. (2020) • To establish the • Questionnaire • Inventory management has a significant Theme 3: Just-in-time
association between survey with 304 positive relation with financial adoption, managerial
inventory management, SMEs of Uganda performance (Orobia et al., 2020). competences, and
financial performance, • Testing hypotheses • Managerial competence has a positive appropriate knowledge
and managerial with Bootstrap association with financial performance.
competence. analysis and AMOS • Key Aspects:
Inventory management has a partially
• To evaluate if the software mediating role between managerial

40 | P a g e
 association between competence and financial performance ▪ Just in time
financial performance (Orobia et al., 2020). inventory
and managerial • The relevant inventory management management
competence is mediated practices that can be adopted by SMEs for ▪ Economic
by inventory effective inventory management include order quantity
management. (Orobia et al., 2020): ▪ ABC analysis
▪ Just in time inventory ▪ Inventory
management control
▪ Economic order quantity planning
▪ ABC analysis ▪ Documentatio
n of store
Chan et al. (2017) To identify inventory Survey questionnaire • The key inventory management issues records
management issues with 80 employees encountered by SMEs include (Chan et ▪ Managing
encountered by al., 2017): stock level
manufacturing SMEs, and ▪ Underproduction and setting
determine the factors that ▪ Overproduction reorder point
can influence inventory ▪ Out of stock and over-stock ▪ Adequate
management effectiveness. situations training of
▪ Delay in raw material delivery employees
▪ Discrepancy in records ▪ Utilisation of
• The inventory management practices that inventory
SMEs can adopt for effective inventory management
management include (Chan et al., 2017):

41 | P a g e
 ▪ Inventory control planning tools and
▪ Documentation of store records techniques
▪ Managing stock level and setting
reorder point
▪ Adequate training of employees
▪ Utilisation of inventory
management tools and techniques

Muchaendepi et al. To explore the inventory • Questionnaires with • Majority of SMEs used the just in time
(2019) management strategies used 244 respondents inventory management method, but
by manufacturing SMEs and • Purposive sampling lacked knowledge on other technological
their impact on performance. technique methods and systems (Muchaendepi et
• Thematic Analysis al., 2019).
• Inventory management systems have a
significant positive impact on the
financial performance of SMEs.
• The relevant inventory management
practices that can be adopted by SMEs for
effective inventory management include
(Muchaendepi et al., 2019):
▪ ABC Analysis
▪ Economic order quantity
▪ Material requirements planning

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 ▪ Vendor managed inventory

Aro-Gordon and To review different inventory • Exploratory survey The inventory management practices that can
Gupte (2016) management approaches of literature be adopted by SMEs for effectively managing
used by businesses in the • Case study analysis inventory are inclusive of (Aro-Gordon and
current era. Gupte, 2016):

• Monitoring various stock levels

• Preparing accurate inventory budgets
• Developing adequate purchase
processes
• Automated inventory systems
• Just in time inventory management
method
• ABC technique for inventory
classification
• Inventory turnover ratio
• Vendor managed inventory
• Lead time analysis

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4.2 Overview of the Themes
Theme 1: Just-in-time Approach of Inventory Management

Relevant research articles were selected and critiqued based on which theme 1 has been
identified. This theme will be elaborated further ahead for answering Research Question 1 in
the next chapter. The theme reflects the fact that JIT practices of inventory management are
most significant for SMEs in ensuring the optimisation of working capital. According to
Phuong and Hung (2020), JIT focuses on ensuring that any SME has a well integrated system
of manufacturing that allows continuous reduction in waste forms, specifically by reduction
of unnecessary delays across flow time, and simultaneous increment in service levels and
flexibility. The key purpose of JIT based inventory management is to reduce the level of
working capital by simultaneous increment in JIT system at service levels (Phuong and Hung,
2020). This is enabled through planning of adherence, optimisation of layout, pull production,
and set-up time reduction.

As reflected by Högerle et al. (2020), inventory has a crucial role to play in the successful
operations of SMEs. As manufacturing SMEs have to sustain inventory in bulk, they require
significant funds for staying up to the commitment. The higher risks of investment justify
business needs for implementing efficient and effective strategies of inventory management
while expecting higher ROI and improved productivity (Högerle et al., 2020). JIT based
inventory management shows concern for efficiently managing stock such that optimum
inventory is maintained in the given working capital (Högerle et al., 2020). Careful
coordination and planning is also necessary for the optimisation of working capital in
inventory.

According to Aminu (2012), introducing adequate procedures and applying systems of

quality management can help to streamline control processes with respect to the aspects of
liabilities, inventories and receivables. When SMEs utilise these two methods, they gain the
ability of optimising their strategies to manage working capital (Aminu, 2012). It is possible
to improve the optimisation of working capital by the introduction of total quality
management system.

Theme 2: Several KPIs of inventory management

Inventory has an extremely crucial role to play for maintaining the overall level of business
health, as excess stock can be as problematic as limited stock. Possible issues can be
inclusive of frustrated customers, missed sales and enhanced costs for non-fulfilment of
orders (Krishnan and Pavithran, 2018). By the utilisation of KPIs for tracking and managing
inventory, SMEs should be improving the processes of purchases and production, along with
profitability and cash flow. In addition, KPIs can assist businesses of all sizes for measuring
the overall effective of business operations (Karadağ, 2018). By reviewing several research
articles, this theme has identified several KPIs of inventory management that can assist SMEs
in managing their profitability. These KPIs are listed further ahead:

1. Days on Hand or Inventory Turnover

2. Average DSI (Days to Sell Inventory)
3. Average Inventory
4. Holding Costs
5. Stock Out KPI
6. Service Level
7. Lead Time
8. Rate of Return
9. Inventory Accuracy
10. Perfect Order Rate

The selected research articles provided valuable insights regarding the effective utilisation of
these KPIs for improving profitability management in SMEs through effective inventory
management.

Theme 3: Just-in-time adoption, managerial competences, and appropriate knowledge

This theme reflects upon various factors that can enhance the effectiveness of inventory
management across SMEs. Inventory management is a significant aspect to make necessary
decisions to manage inventory (Aro-Gordon and Gupte, 2016). This includes practices like
carrying out relevant activities, placing appropriate policies for managing inventory, and
placing procedures to handle inventory. These best practices are crucial for ensuring
sufficient quantity of all inventories within the warehouse at all points of time (Chan et al.,
2017). In addition, the theme identifies that SMEs should be placing significant efforts to
control inventory costs by the management of inventory.

45 | P a g e
There are currently numerous models that can be used by SMEs for the development of a
robust digital inventory management system. This may include vendor- or supplier-managed
inventory, partnering with different businesses, and third-party fulfilment. According to Song
et al. (2020), the adoption of a cross-functional approach comprising sales, marketing,
operations and procurement is essential for small businesses during the development of
strategies for inventory management. The authors asserted that small businesses can also
benefit through the appointment of managers for specifically overseeing the functions of
purchasing and inventory management (Song et al., 2020).

According to Orobia et al. (2020), an effective system of inventory management at SMEs can
assist in reducing the level of challenges in the key operations and the overall level of
financial management. Therefore, the research highlights that improved management of
inventory in SMEs allow significant enhancement in the quality of performance outcomes. In
short, the key purpose of inventory management lies in ensuring that there are sufficient
financial resources for the business (Orobia et al., 2020). Based on the theme identified in the
critical literature review, funding, employee skills and knowledge, document records, and
inventory control planning are key factors that impact the effective management of inventory.
This level of effectiveness lies in augmenting business operation for ensuring smooth flow of
products, services and resources. Planning is the most important method which can be
utilised for controlling and managing inventory through demand forecasts, safety
consideration, reorder point, and inventory planning (Muchaendepi et al., 2019). Therefore,
SMEs need to focus on a number of these aspects for enhancing the effectiveness of their
inventory management practices so that there is effective optimisation of working capital and
management of profitability.

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Chapter 5: Discussion

5.1 RQ1: What approaches of inventory management can assist SMEs in effective
optimisation of working capital?
Relevant research articles were selected and critiqued based on which theme 1 has been
identified. This theme will be elaborated further ahead for answering Research Question 1 in
the next chapter. The theme reflects the fact that JIT practices of inventory management are
most significant for SMEs in ensuring the optimisation of working capital. Theme 1 also
indicates the insight that the effective practices for optimising inventory management can
support the overall optimisation of working capital. Working capital is crucial for SMEs as it
is a crucial necessity (Aminu, 2012). In the absence of working capital, SMEs will not have
the ability of sustaining the operations, and hence, struggle to attain profitability. On the
contrary, the strong optimisation of working capital can help SMEs in meeting business costs
even in the duration of financial instability.

As reflected from in this research, the cycle of working capital is related to the duration
required by a company for the net current liabilities and current assets when converting into
cash. The cycle for optimising working capital focuses on four key business aspects namely,
inventory, payables, receivables and cash (Högerle et al., 2020). The cycle is equal to the sum
of inventory turnover and debtors turnover in days, while deducting creditors turnover from
it. With a short cycle of working capital, the SMEs will have the ability of freeing up its cash
to be used in terms of working capital. On the contrary, a longer cycle of working capital
implies locked capital throughout the operational cycle without the need to yield a lot of
return (Högerle et al., 2020). Thus, SMEs should prefer shorter cycle of working capital for
improving liquidity condition in the short-term and further considering the enhancement of
operational efficiency. While there is subjective cycle of working capital across different
industries and sectors, it is necessary for SMEs to consider their comparison against industry
peers.

This was a crucial aspect in this research to investigate the financial impact of inventory
management across SMEs. By critiquing 10 articles for the research, it can be concluded that
management of inventory is among the most challenging tasks for managers of working
capital. They have the responsibility of minimising inventory to the lowest possible scope
while shortening the cycle of cash conversion and reducing costs (Phuong and Hung, 2020).

47 | P a g e
However, the managers cannot take risk of minimizing the inventory down to level zero as
this will result in the failure of SMEs in meeting the respective demands. These can be costly
situations for SMEs because of the revenues being lost. An additional challenge for managers
of working capital is ensuring all managers of the business agreed about the management of
inventory (Phuong and Hung, 2020). All managers will have their own perceptions related to
inventory use which can impact joint decision making for inventory management. All SMEs
should have the ability of balancing these decisions so that there is maximum effectiveness of
inventory management.

According to theme 1, JIT approach has been identified as an important strategy for effective
management of inventory and maintaining minimum levels of inventory. The JIT strategy for
optimising working capital focuses on manufacturing the ordered material, while ensuring
just in time production and deliver as required and not prior to it (Franco and Rubha, 2017).
The research has perceived the fact that even though there is different inventory across
industries, it is crucial for all SMEs to consider the management of inventory. The processes
of lean manufacturing for streamlining the processes of JIT production and manufacturing are
valuable techniques for the management of inventory (Bendavid et al., 2017). However,
theme 1 indicates that if SMEs try reducing the turnover of inventory aggressively, a
significantly large supply or demand shock can result in their inability of meeting the present
demand.

Theme 1 further indicates that even though inventory forecasts are not 100 per cent efficient,
it is an effective gauge for determining optimal cycle of inventory in all commodities. In
addition, SMEs have the option of brainstorming several ways for increasing sales and
decreasing time required for the sale of inventory. With the early clearance of stock, the cycle
of working capital can be boosted through the effective optimisation of inventory
management. According to Shin et al. (2015), the significance of achieving optimal level of
current liabilities and current assets is dependent on the management in its efforts for
maintaining a balance between profitability and liquidity. Excessive current assets level,
particularly inventory and account receivables, results in inefficient utilisation of cash (Shin
et al., 2015).

Furthermore, it also threatens the operating process in SMEs, further resulting in lower
profits. This can further lead to low market value of the organisation. In their research,

48 | P a g e
Samiloglu and Akgün (2016) asserted that lower current assets level can result in creating a
liquidity issue for the organisation, corollary issue with the settlement of its obligation, and
ineffectiveness for achieving growth in business. As reflected in the SLR, this not only
threatens the operational process, but also lowers profit non-conformity with the aim of profit
maximisation (Samiloglu and Akgün, 2016). The forgoing businesses manage their working
capital for generating more profits, considering that their working capital is managed by them
for producing liquidity to the businesses. However, it is important for such businesses to
maintain an adequate liquidity level for meeting their day to day operations (Samiloglu and
Akgün, 2016). Moreover, profitability can be hampered by short or excessive levels of
liquidity.

SMEs should be ascertaining considerable risks in link with working capital, and hence, if
there should be adoption of moderate, aggressive or conservative method for making
investment in working capital (Phuong and Hung, 2020). Any conservative policy of working
capital investment in SMEs focuses on decreasing the risks of operational failure by the
maintenance of working capital at higher levels. Theme 1 has further identified that
aggressive strategy of working capital investment can assist in overcoming the financial cost
and further improving profitability. This could be enabled by the utilisation of methods to
lower down inventories, advanced recovered credit time, and due supplier instalments
(Phuong and Hung, 2020). Theme 1 finally highlights that the moderate policy of working
capital is a common approach that SMEs adopt for the sufficient optimisation of inventory
such that working capital can be optimised accordingly.

5.2 RQ2: What measures of inventory management should SMEs adopt for the
management of profitability effectively?
When considering practices of inventory management, the research identifies that it is crucial
to adopt various metrics. As all SMEs are different by nature and structure, the key lies in
determining which metrics are most suitable for the SMEs. By reviewing several research
articles, theme 2 has identified relevant KPIs of inventory management that can assist SMEs
in managing their profitability. These KPIs are discussed further ahead:

1. Days on Hand or Inventory Turnover: This particular KPI focuses on examining

the number of times there is sale and replacement of an inventory under a specific
time duration. If there is low level of turnover, the SME will end up having excess

49 | P a g e
 stock or limited sales (Narkhede and Rajhans, 2020). The calculation of this metrics is
done either by dividing Average Inventory with Cost of Goods Sold or by dividing
inventory with sales.
2. Average DSI (Days to Sell Inventory): The KPI focuses on measuring total time
taken by companies for conversion of inventory within sales (Ferenčíková, 2014).
There can be industrial variations in this KPI based on the product being sold. In the
typical sense, perishable items move faster than non-perishable items and hence, this
factor must be considered while utilising this KPI. DSI can be calculated by
(Inventory/ Cost of sales) x 365 (Ferenčíková, 2014).
3. Average Inventory: There is utilisation of this KPI for estimating the in-hand
availability of inventory for the company in a specific time duration (Mat and Kadir,
2016). The key objective lies in avoiding unanticipated drops or spikes in inventory,
while maintaining consistency in the overall flow of inventory as per the business
needs involved. Average inventory can be calculated by= (Ending Inventory +
Beginning Inventory)/ 2 (Mat and Kadir, 2016).
4. Holding Costs: The KPI focuses on measurement of costs regarding the storage of
unsold inventory (Ngubane et al., 2015). This is inclusive of cost for spoiled and
damaged goods, along with the cost of insurance, labour, and storage space. For the
reduction of holding costs, it is necessary for SMEs to consider the designation of
reorder point.
5. Stock- Out KPI: This KPI focuses on the number of times no demand is met because
of the lack of inventory requirement, while reflecting upon frustrated clients, missed
opportunities and lost sales (Bendavid et al., 2017). This helps in providing a clear
picture about the effectiveness of SMEs in purchasing and producing.
6. Service Level: This particular KPI can be utilised for computing required amount of
inventory for avoiding any stock out (Narkhede and Rajhans, 2020). The KPI of
service level indicates a significant compromise between the value of stock out and
the value of inventory.
7. Lead Time: This KPI is a crucial component for the management of supply chain and
the process of inventory control (Karadağ, 2018). For the calculation of lead, it is
necessary to consider the amount of time taken by a supplier in delivery once there is
placement of order, while adding the time of transpiration across the need of placing
order again.

50 | P a g e
 8. Rate of Return: This KPI is important for tracking and rating the share of orders that
require restocking and need to be returned (Karadağ, 2018). There is equal
significance to track the returns reason while addressing all issues across the supply
chain. This will also be helpful for the identification of major trends that can assist in
the prevention of costly returns in the future.
9. Inventory Accuracy: This particular KPI allows the prevention of any issue due to
inaccuracy of inventory. This considers the overall performance of inventory for
verifying the accuracy of internal data.
10. Perfect Order Rate: This particular KPI is the overall orders ratio for the purpose of
fulfilling the following (Aro-Gordon and Gupte, 2016): the right document, right
quantity and package, right product, and right place of delivery. A higher value of this
KPI can further result in the enhanced satisfaction of customers.
11. Order Filling Accuracy: This KPI is a cornerstone for the success of all operations.
If there is no scope of receiving the right order, customer will not show hesitance in
going someplace else (Karadağ, 2018). This has more dependence than just the KPI of
inventory accuracy. The enhanced automation of these operations provides an easier
scope of generating higher rates of accuracy.
12. Order Cycle Time: This KPI is closely related to the KPIs of order filling accuracy
and inventory accuracy (Aro-Gordon and Gupte, 2016). The KPI of order cycle time
helps in tracking the amount of time spent between the period of placing the order and
the period of its shipment. The key objective lies in minimising the cycle time of
order comprehensively or internally.

The research has identified the above KPIs as these are crucial in order to maximise
efficiency and profitability in the operations of SMEs with effective inventory management
based on the working capital assigned. As identified under theme 2, the warehouse operators
of SMEs tend to struggle in successfully maintaining and improving performance,
specifically as there can be extremely complex operations. Customers may show reluctance
towards embracing functional advancement, which are perceived as extremely complex for
SMEs (Krishnan and Pavithran, 2018). This reluctance can deprive the SME of effective data
required for making decisions of high ROI related to the operations (Bandara and Rathnasiri,
2016). Therefore, theme 2 reflects that the finance department of SMEs should be justifying
the value of all investments with effective inventory management by utilising the right

51 | P a g e
metrics. This can assist SMEs in enhancing operational efficiency and fast delivery by
utilising the right metrics of inventory management.

Out of these KPIs, theme 2 identifies that three most significant KPIs for SMEs are inventory
accuracy, order filling accuracy and order cycle time. The best way of improving the value of
these three KPIs is improved slotting by the utilisation of WMS software for automatically
handling the process (Bendavid et al., 2017). Based on theme 2, it can be concluded that the
increment of inventory accuracy and order picking accuracy while ensuring the reduction of
order picking duration; will also be helpful. In the overall context, theme 2 has provided
valuable insights about these KPIs as they can be extremely useful for SMEs in maintaining
their overall profitability.

5.3 RQ3: What best practices can be recommended to SMEs for the effective management
of inventory?
Theme 3 identified by reviewing the selected articles highlight that effectiveness of inventory
management determines the scope for maximising profitability of a business. Maximum
profit is highly dependent upon maximised revenue and minimised costs (Muchaendepi et al.,
2019). Maximisation is identified in this research as a highly efficient concept where there is
no requirement of profit increment without the increased utilisation of working capital and
other resources.

The key findings from theme 3 indicate that long period of accounts payable and maximum
control over working capital has a positive impact on the overall scope of business
profitability. On the contrary, less control over working capital and long periods of inventory
management negatively affected the overall scope of profitability in SMEs (Bandara and
Rathnasiri, 2016). Theme 3 further highlights that managers should be increasing their profits
by reducing down days of accounts receivable and inventory turnover. In addition, they can
consider the increment of profitability by negotiation of improved credit terms with the
suppliers so that they have the ability of increasing days of accounts payable since longer
days of account payable positively impacts profitability of SMEs (Aro-Gordon and Gupte,
2016). The owners and managers of SMEs should focus on minimising the duration of time
taken in conversion of raw materials with final goods. It is necessary to conduct stock
controlling for avoidance of over production or excess stocking as it will lead to high
maintenance cost while affecting the working capital available.

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Theme 3 reflects upon various factors that can enhance the effectiveness of inventory
management across SMEs. Inventory management is a significant aspect to make necessary
decisions to manage inventory (Orobia et al., 2020). This includes practices like carrying out
relevant activities, placing appropriate policies for managing inventory, and placing
procedures to handle inventory. These best practices are crucial for ensuring sufficient
quantity of all inventories within the warehouse at all points of time (Orobia et al., 2020). In
addition, the theme identifies that SMEs should be placing significant efforts to control
inventory costs by the management of inventory.

There are currently numerous models that can be used by SMEs for the development of a
robust digital inventory management system. This may include vendor- or supplier-managed
inventory, partnering with different businesses, and third-party fulfilment. According to Song
et al. (2020), the adoption of a cross-functional approach comprising sales, marketing,
operations and procurement is essential for small businesses during the development of
strategies for inventory management. The authors asserted that small businesses can also
benefit through the appointment of managers for specifically overseeing the functions of
purchasing and inventory management (Song et al., 2020).

According to Orobia et al. (2020), an effective system of inventory management at SMEs can
assist in reducing the level of challenges in the key operations and the overall level of
financial management. Therefore, the research highlights that improved management of
inventory in SMEs allow significant enhancement in the quality of performance outcomes. In
short, the key purpose of inventory management lies in ensuring that there are sufficient
financial resources for the business (Chan et al., 2017). Based on the theme identified in the
critical literature review, funding, employee skills and knowledge, document records, and
inventory control planning are key factors that impact the effective management of inventory.
This level of effectiveness lies in augmenting business operation for ensuring smooth flow of
products, services and resources. Planning is the most important method which can be
utilised for controlling and managing inventory through demand forecasts, safety
consideration, reorder point, and inventory planning (Chan et al., 2017). Therefore, SMEs
need to focus on a number of these aspects for enhancing the effectiveness of their inventory
management practices so that there is effective optimisation of working capital and
management of profitability.

53 | P a g e
In order to achieve a best-practice system for inventory management, it is important for small
businesses to effectively comprehend availability of component and commodity, current
market pricing (upstream as well as downstream), and sales forecasts (Rashid, 2016). In this
context, SCM and ERP softwares usually deliver real-time visibility into supplier and point-
of-sale data (Wang and Hu, 2018). Moreover, SMEs can also make use of different data
analytics tools and accounting software systems for acquiring deeper insights related to real-
time trends. SMEs may also benefit through the utilisation of third-party data that provide
crucial information associated with market conditions and seasonal demand fluctuations
(Wang and Hu, 2018).

The ability of automating processes as well as gaining visibility into external and internal
factors can be crucial for SMEs in the development of a more flexible and agile inventory
management framework (Akindipe, 2014). This may require the utilisation of smart phones,
RFID, bar-coding, and other advanced technological developments. It may also require the
utilisation of cloud resources and network for providing decision makers with important
insights on real-time basis (Singh and Verma, 2018). In an overall sense, the development and
adoption of a best-practice inventory management approach can result in several benefits for
SMEs including high profit margins, lower costs, and the potential of benefitting from market
disruptions and changing conditions.

Based on theme 3 identified from the SLR, SMEs should be developing a strong positive
relationship with their creditors by reducing down the days of accounts payable. The key
findings of the research have also highlighted that any modifications in the components of
working capital will lead to massive changes in all of the financial components of SMEs. By
the enhanced movement of stock, SMEs will have the ability of making payments to creditors
earlier while strengthening the level of liquidity (Chan et al., 2017). SMEs should have the
ability of diligently following debts, appraising customers before provision of debts,
providing incentives for initial payments of debt, and developing strong policy of debt
management (Muchaendepi et al., 2019). Theme 3 identified in the research indicates that
these practices are crucial for the improvement of accounts receivables and elimination of
bad debts such that there is simultaneous increment in inventory turnover and sales.

Effective management of product can further assist in boosting ROI and sales when utilised
in a correct manner. By the streamlined processes of sales, shipment and production for

54 | P a g e
ensuring that demands are met; there is a possibility of boosting revenue over the inventory
sold (Aro-Gordon and Gupte, 2016). Two key practices identified under theme 3 that can be
used for effective inventory management in SMEs are inventory shrinkage and inventory
analysis. The application of inventory analysis provides a significant scope to organise
products in maximising sales which assists in focusing upon inventory and meeting the
respective demand. Inventory shrinkage has also been identified as an important approach for
reducing inventory in SMEs (Aro-Gordon and Gupte, 2016). This is a valuable process of
utilising analytics for determining the requirement of inventory at a specific time as per past
sales data. This can assist in shrinking the level of surplus inventory while supplying products
for sale.

5.4 Final Insights on Financial Impact of Inventory Management on SMEs

The key findings of this research provide valuable insights regarding the significance of
inventory management across SMEs. 10 credible articles were reviewed to understand the
value of inventory management in different facilities and locations such that an effective
supply network can be maintained. As reflected throughout the research, the practices of
inventory management adopted by SMEs can have a significant financial impact in terms of
working capital and profitability.

As per the themes identified in the research, according to Vitez (2021), working capital and
inventory share a symbolic relationship in an organisation. Working capital, as highlighted in
theme 1 is regarded as a financial formula for measuring the operating liquidity of an
organisation. The fundamental formula for working capital is current assets subtracted by
current liabilities, considering inventory as part of the current assets of a business (Vitez,
2021). Therefore, the findings indicate that SMEs deriving huge amount of sales will usually
have abundant amount of inventory that can impact the formula of working capital.
According to Bendavid et al. (2017), inventory can be regarded as a liquid asset in terms of
accounting. This inventory can be sold by businesses fairly quickly for increasing cash to pay
operating bills. Accounts payable is used by most businesses for paying new inventory
purchases (Bendavid et al., 2017). Hence, inventory impacts working capital on both the
aspects of liability and asset. Businesses are usually unable to buy huge amounts of inventory
for improving their position of working capital. This metric helps in ensuring that business
stakeholders cannot be misled by the organisation through simple transactions.

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Relevant research articles were selected and critiqued based on which theme 1 has been
identified. This theme has been elaborated earlier for answering Research Question 1 in the
previous section. The theme reflects the fact that JIT practices of inventory management are
most significant for SMEs in ensuring the optimisation of working capital. According to
Phuong and Hung (2020), JIT focuses on ensuring that any SME has a well integrated system
of manufacturing that allows continuous reduction in waste forms, specifically by reduction
of unnecessary delays across flow time, and simultaneous increment in service levels and
flexibility. The key purpose of JIT based inventory management is to reduce the level of
working capital by simultaneous increment in JIT system at service levels (Phuong and Hung,
2020). This is enabled through planning of adherence, optimisation of layout, pull production,
and set-up time reduction.

As reflected by Högerle et al. (2020), inventory has a crucial role to play in the successful
operations of SMEs. As manufacturing SMEs have to sustain inventory in bulk, they require
significant funds for staying up to the commitment. The higher risks of investment justify
business needs for implementing efficient and effective strategies of inventory management
while expecting higher ROI and improved productivity (Högerle et al., 2020). JIT based
inventory management shows concern for efficiently managing stock such that optimum
inventory is maintained in the given working capital. Careful coordination and planning is
also necessary for the optimisation of working capital in inventory (Franco and Rubha, 2017).
According to Aminu (2012), introducing adequate procedures and applying systems of
quality management can help to streamline control processes with respect to the aspects of
liabilities, inventories and receivables. When SMEs utilise these two methods, they gain the
ability of optimising their strategies to manage working capital (Aminu, 2012). It is possible
to improve the optimisation of working capital by the introduction of total quality
management system.

In addition, the research has highlighted that inventory management practices have a
significant impact on the financial records of SMEs in four ways namely, profitability, cash
flow, balance sheet and working capital (Krishnan and Pavithran, 2018). The research
concludes that any errors in the calculation of inventory can have cascading impacts on
income, profits and cost of goods sold. There are a number of reasons that could reflect
inaccuracy of inventory (Chan et al., 2017). In all of these cases, SMEs have to focus on
adjusting their inventory for maximum value accuracy. Therefore, accuracy of inventory

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management is crucial for maximum accuracy of profitability which makes it a good factor to
indicate forecasting (Chan et al., 2017). The adjustment of inventory cannot be identified as a
yearly affair. This has to be done frequently so that no major modifications take place in the
value of inventory while initiating changes. Due to this reason, the research highlights that
SMEs must not ignore the utilisation of inventory reserve accounts. In terms of cash flows,
inventory management can help in avoiding tax burden, and hence, it has a significant
financial impact on SMEs (Narkhede and Rajhans, 2020). It can finally be concluded that the
SLR conduct provided valuable insights about the financial impact of inventory management
practices adopted by SMEs with specific emphasis upon the effective management of
working capital and profitability.

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Chapter 6: Conclusion

6.1 Conclusion of Key Findings

The key findings of this research provide valuable insights regarding the significance of
inventory management across SMEs. 10 credible articles were reviewed to understand the
value of inventory management in different facilities and locations such that an effective
supply network can be maintained. As reflected throughout the research, the practices of
inventory management adopted by SMEs can have a significant financial impact in terms of
working capital and profitability.

The improvement of inventory management in SMEs can be challenging in a formidable

manner, as it is associated with almost all aspects of the business. In this context, it is not
only essential to monitor pricing of components and raw materials, but also understand the
variables of demand and supply (Phull et al., 2016). Furthermore, it is also important for
SMEs to address the continuously changing global pricing and availability, as well as the
sales demand and market conditions. In order to develop an ideal digital inventory
management system, it is important for SMEs to emphasise on several factors like
comprehending market conditions, developing a trusted group of vendors and suppliers, and
price negotiations (Munyao et al., 2015). It also requires the development of internal systems,
tools and technologies that can deliver insights to assist in shaping global inventory
management. All of these aspects have been discussed throughout this research for answering
the research questions and achieving the research objectives.

Theme 1 has highlighted that even though inventory forecasts are not 100 per cent efficient, it
is an effective gauge for determining optimal cycle of inventory in all commodities. In
addition, SMEs have the option of brainstorming several ways for increasing sales and
decreasing time required for the sale of inventory (Högerle et al., 2020). With the early
clearance of stock, the cycle of working capital can be boosted through the effective
optimisation of inventory management. With a short cycle of working capital, the SMEs will
have the ability of freeing up its cash to be used in terms of working capital. On the contrary,
a longer cycle of working capital implies locked capital throughout the operational cycle
without the need to yield a lot of return (Phuong and Hung, 2020). Thus, SMEs should prefer
shorter cycle of working capital for improving liquidity condition in the short-term and
further considering the enhancement of operational efficiency. While there is subjective cycle

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of working capital across different industries and sectors, it is necessary for SMEs to consider
their comparison against industry peers.

The research has identified 12 KPIs that are crucial in order to maximise efficiency and
profitability in the operations of SMEs with effective inventory management based on the
working capital assigned. These 12 KPIs are: Inventory turnover, average DSI, average
inventory, holding costs, stock-out KPIs, service level, lead time, rate of return, inventory
accuracy, perfect order rate, order filling accuracy and order cycle time (Karadağ, 2018). As
identified under theme 2, the warehouse operators of SMEs tend to struggle in successfully
maintaining and improving performance, specifically as there can be extremely complex
operations. Customers may show reluctance towards embracing functional advancement,
which are perceived as extremely complex for SMEs (Narkhede and Rajhans, 2020). This
reluctance can deprive the SME of effective data required for making decisions of high ROI
related to the operations. Therefore, theme 2 reflects that the finance department of SMEs
should be justifying the value of all investments with effective inventory management by
utilising the right metrics. This can assist SMEs in enhancing operational efficiency and fast
delivery by utilising the right metrics of inventory management.

Based on theme 3 identified from the SLR, SMEs should be developing a strong positive
relationship with their creditors by reducing down the days of accounts payable. The key
findings of the research have also highlighted that any modifications in the components of
working capital will lead to massive changes in all of the financial components of SMEs. By
the enhanced movement of stock, SMEs will have the ability of making payments to creditors
earlier while strengthening the level of liquidity (Orobia et al., 2020). SMEs should have the
ability of diligently following debts, appraising customers before provision of debts,
providing incentives for initial payments of debt, and developing strong policy of debt
management (Muchaendepi et al., 2019). Theme 3 identified in the research indicates that
these practices are crucial for the improvement of accounts receivables and elimination of
bad debts such that there is simultaneous increment in inventory turnover and sales.

6.2 Practical Recommendations for SMEs

According to Ngubane et al. (2015), increased visibility into inventory levels is crucial for
SMEs in order to ensure effective inventory management. This usually indicates identifying
low-value and high-value items through the approach of ABC analysis or selective inventory

59 | P a g e
control (Ngubane et al., 2015). The method of ABC analysis recognises that all inventory and
stock are not equal, and classifies inventory into three categories (A,B and C), and in
descending order of value. The selective inventory control method allows businesses to
emphasise on inventory resources and investments according to their significance. According
to Ravinder and Misra (2014), ABC analysis assists organisations in optimising their
warehouse space, recognising better pricing strategies, and identifying appropriate suppliers
for the right components or materials (Ravinder and Misra, 2014). ABC analysis is supported
by various software programs for classifying inventory items on the basis of consumption
values of items.

There are currently numerous models that can be used by SMEs for the development of a
robust digital inventory management system. This may include vendor- or supplier-managed
inventory, partnering with different businesses, and third-party fulfilment. According to Song
et al. (2020), the adoption of a cross-functional approach comprising sales, marketing,
operations and procurement is essential for small businesses during the development of
strategies for inventory management. The research has asserted that small businesses can also
benefit through the appointment of managers for specifically overseeing the functions of
purchasing and inventory management (Song et al., 2020).

The adjustment of inventory cannot be identified as a yearly affair. This has to be done
frequently so that no major modifications take place in the value of inventory while initiating
changes (Muchaendepi et al., 2019). Due to this reason, the research highlights that SMEs
must not ignore the utilisation of inventory reserve accounts. In terms of cash flows,
inventory management can help in avoiding tax burden, and hence, it has a significant
financial impact on SMEs. It can finally be concluded that the SLR conduct provided
valuable insights about the financial impact of inventory management practices adopted by
SMEs with specific emphasis upon the effective management of working capital and
profitability.

6.3 Research Limitations and Future Research Recommendations

Even though valid efforts were placed for conducting this research effectively, similar to all
researches, this research also involved specific limitations. Firstly, the biggest limitation of
this research is that the sample size for this secondary research was limited to SMEs. This
means that the key findings of this research cannot be applied to all scenarios for effective

60 | P a g e
inventory management among MNCs. Moreover, the research findings maintained sole
dependence upon obtaining key insights through the collection of secondary data. The
credibility of the research and scope of evidences to support the claims of the research could
be enhanced by the collection of primary data. Even though this is not a research limitation
because secondary research was highly justified, the use of primary data can still provide
better insights of practical recommendations and future prospects on the selected topic.

Therefore, future researchers can place additional efforts by effective primary data collection
and analysis for improving the practices of inventory management across SMEs. The
research sample can also be increased for generalising the key findings in accordance with
MNCs as well. Further ahead, future researchers can elaborate the key findings of this
research by conducting a survey to support the claims that inventory management can impact
the working capital and profitability of SMEs. In addition, the credibility of the research can
be enhanced by the consideration of research strategies like interview and focus group with
MNCs as well as SMEs. The collection of primary data related to the research will not only
enhance the credibility of existing research but also improve prospects of recommendations
for companies operating in different industries and sectors.

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